FINE GAEL LAUNCHED its party manifesto last Sunday, which included the surprising plan to pay €1,000 into an “acorn savings account” for all newborns, and €1,500 for children from families receiving child support payments.
The total description of the scheme in the manifesto comes to a little over 200 words, in which they say that the scheme is “inspired by successful models in the UK.”
It goes on to say that the aim of the plan is to “help families build a financial foundation for each child’s future, promoting a lifelong habit of saving” as well as helping to “tackle inequality”.
Families are encouraged to contribute additional money into this account, by up to €2,000 a year.
The manifesto also says that the money in these accounts will accrue “via a managed fund at a conservative interest rate of 4% per annum, compounded yearly”.
“The model being adopted is a managed fund within ISIF,” a Fine Gael spokesperson told The Journal. “The initial contribution is invested by the State on behalf of the child and Fine Gael has estimated the capital compounding at a rate of 4%.”
The ISIF (Ireland Strategic Investment Fund) is managed and controlled by the National Treasury Management Agency (NTMA), with a mandate to “invest on a commercial basis to support economic activity and employment in Ireland.”
But what was the UK model that Fine Gael’s manifesto said had “inspired” this plan?
The Child Trust Fund (CFT) was introduced to the UK in the New Labour manifesto of 2001 and launched in 2005, setting up saving accounts for children born from 2002 onwards.
The scheme saw an initial payment of £250 given to each child at birth (this was doubled for some poorer families), with planned additional payments when each child turned 7 and 11.
Families were encouraged to contribute additional funds (like Fine Gael’s plan) because the scheme was partly to coax parents into saving money for their own children.
However, in 2010, as the UK sought ways to reduce spending in the wake of the financial crash, the Conservative-Liberal Democrat government decided that no new funds would be added to these accounts.
The Child Trust Fund has since been replaced by an alternative scheme that bears little relation to the plans proposed by Fine Gael.
The first children enrolled in the scheme turned 18 in 2020, allowing them to withdraw the money that had been invested for them.
However, as we shall see, this did not always turn out to plan.
Like with, Fine Gael’s manifesto, there appears to be multiple motivations behind the UK’s Child Trust Fund. The government wanted to encourage people to save, it wanted to reduce inequality, and it wanted to give people a boost as they transitioned into adulthood.
Was it successful in these aims?
“I don’t consider the UK scheme as a success”, Carl Emmerson, Deputy Director of the Institute of Fiscal Studies, an independent British economics research institute, told The Journal.
“Perhaps this is demonstrated by the fact that it was one of the very first things to be cut by the incoming coalition government following the May 2010 election.
“While I don’t think a scheme like the child trust fund does harm, I think the key question is whether it is the best policy action to take.
“For example alternative policies would include more spending on schools or tax cuts or benefit increases to boost the incomes of households with children.”
So, what does the data on the UK model show?
Both the FG and New Labour plans were intended to increase the amount of money that parents saved for their children. Did this work?
“Formalised impact analysis identified no statistically significant effect.. on rates of active saving for children.. or on the total amounts held in savings among children overall”, read a report on the programme released by His Majesty’s Revenue and Customs (HMRC, the British equivalent of Revenue) in 2011.
However, an analysis released last year came up with different results and showed that children eligible for the programme had savings worth about €510 higher than those who weren’t.
However, the report also noted downsides to the scheme.
“We observe strong associations between financial wealth and income of the family and the savings for children”, the 2023 research noted — effectively saying that the scheme worked, but more-so for the children of the wealthy.
“Children from poorer families gained from the policy, and most would have had zero savings without it.
“However, as is common with tax-privileged savings, the greatest benefits went to those from better-off families.”
Given that all the children were given a set amount of money at the start, except for top-ups given to poorer children, the scheme had an element of wealth distribution which should generally be considered as reducing inequality.
“Generations of children who born between 2002 and 2011 all have some capital once they turn 18,” Dr Rajiv Prabhakar, a senior economics lecturer at the Open University who had researched the scheme told The Journal.
”In 2022 30% of UK adults had no savings or investments less than £1,000.
“Having modest savings can provide a buffer to help people cope with unexpected emergencies. The Child Trust Fund thus ensures that all those people who have such an account have a financial buffer, and this can help combat poverty.”
However, Prabhakar and other experts who spoke to The Journal cautioned against over estimating these effects on inequality.
“These policies will have a big impact on the distribution of wealth among 18-year-olds (as most 18-year-olds don’t have much wealth) but they are obviously pretty small beer in the overall distribution of wealth,” Carl Emmerson of the Institute of Fiscal Studies told The Journal.
However, there was more to the scheme than simply depositing money in accounts for children.
Like Fine Gael’s plan, parent’s could also contribute (or invest) money into this account for their children, accruing interest in time.
This has led some commentators to compare them with SSIA accounts — where people were encouraged to save money which would be “boosted” by the government, making these excellent investments. At least, for those who were able to afford to save.
The new scheme proposed in the Fine Gael manifesto allows families to add up to €2,000 a year to the account
“With this regular contribution and the government’s initial €1,000, the account could reach €53,316 by the time the child turns 18,” the manifesto reads.
An account that doesn’t get additional savings put into would only reach just over €2,000 at 4% interest over 18 years. Even those from families receiving child support, eligible for the €1,500 initial government investment, would only see their sum grow to about €3,000.
“You’re enshrining inequality for children all the way up”, Louise Bayliss of Focus Ireland told RTÉ Radio on Sunday, arguing that the money could be better spent on targeted supports for vulnerable children.
“Why will some children be entitled to €3,000 and some be entitled to €53,000?”
One of the major expected benefits of the Fine Gael plan is also to “support future generations”. But what was the effect of the UK scheme?
“The timing in the UK makes this hard to do,” Carl Emmerson of the Institute of Fiscal Studies told The Journal.
“The obvious thing to do would be to compare the outcomes for those born either side of the cut-off to be eligible. But in the UK this was August and September 2002 and, at least for England and Wales, that coincides with the start of the school year.
“This means that the children born just too soon to get an account could have left school 12 months before the first children to get an account. And the timing is unfortunate as they turned 18 in the middle of Covid-19, (in 2020) so there are lots of reasons why their outcomes could be different to those leaving school earlier.”
Dr Prabhakar also warned that it was hard to discern how these lump sums received by 18-year-olds were used.
“There was no systematic collecting of relevant data after the scheme was discontinued in 2011,” he noted.
There are other reasons to be wary of the effects of this scheme, including the story of one British boy who, upon turning 18, found that his Child Trust Fund account was worth only £12.39 — the rest had been charged in fees by the fund managing the account.
HMRC also put out an appeal in September, urging the 671,000 young people who had not claimed their CTF account to collect the money owed to them. It is likely that many had simply nor heard of a government savings scheme that ended more than a decade ago.
The HMRC had previously estimated that about £1.7 billion of Child Trust Funds had gone unclaimed.
They also warned an industry had sprung up to help those who could not locate their accounts, with businesses often charging young people hundreds of pounds to find out who had the money that they were owed.
Update: Fine Gael responded to queries on the source of interest in the Acorn Savings accounts after this article was published. Information about ISIF investments was added on 21 November.
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